Regulus Partners, the strategic consultancy focused on international gambling and related industries, takes a look at some key developments for the gambling industry in its ‘Winning Post’ column.

Sweden: remote POC legislation – drafts or chess?

The Swedish government has published a draft law to regulate gambling across channels, with an implementation date of 1 January 2019 (replacing the Lottery Act, 1994 and the Casino Act, 1999). The legislation sets out a regime which appears liberal and transparent – in line with what was expected. While tax is not mentioned, this is expected to be set at 18% of revenue: a rate that compares favourably to nearly every global jurisdiction.

Given how important Sweden is to a material number of online gambling operators, the draft law is therefore likely to have been consumed with anticipated relief over Christmas. However, we identify a number of areas that might offer a sting in the tail and we predict a complex game of cat and mouse being played out in the coming months.

The first area to flag is establishment: the Act envisages licensees being based in Sweden unless there is an explicit agreement in place with other licensing regimes. While these agreements may be readily forthcoming, the temptation to capture tax and employment will be real, and may also suit businesses with a significant domestic presence. If an offshore business were required to set up in Sweden, this would likely double the effective tax rate in terms of cost of operations.

Second, the law envisages granting powers of group and affiliated structure investigation to the regulator in order to ensure the probity of licensees. While this is nothing new, there could be a specific area of sensitivity for Nordic businesses given the rather loose prevailing definition of ‘grey’ markets when taking money from Norway and Finland – both of which have clear and recent monopoly legislation in place. It is not inconceivable that the ‘Nordic’ regulators will want to work closely together and this could increase enforcement risk for ‘dark grey’ markets in general and Nordic revenue in particular.

Third, the law provides the regulator with the power both to specify the overall games being licensed and the parameters of those games. In an outright move, betting on lotteries without the consent of the lottery licence holder is to be banned, but other nuances are likely to creep in, in the name of player protection which could materially distort the market. The two most sensitive areas here are slots and in-play betting. It is likely that Svenska Spel will see this as a key battle ground to preserving its dominance (even relevance) in an officially competitive marketplace.

Finally, there is significant coverage of social responsibility and player protections (both data and funds), currently all worded in sensible but sometimes imprecise ways. Again, how these aims and policies will make their way into regulatory frameworks will be critical, especially around marketing, bonuses, self-testing and self-exclusion.

Sweden is a material .com online gambling market (c. €600m – excluding ATG and Svenska Spel) with a number of operators more or less dependent upon its cash flow. It has been almost taken for granted that Sweden would regulate online gambling in a liberal way and the draft law certainly points to that outcome. However, it is impossible to get any more ‘liberal’ than the current state of no tax and no domestic regulation at all.

Change is now coming: it will increase cost and it is very unlikely to grow the market. The key now is to see whether liberal intentions become non-interventionist reality. For this to happen, Swedish-facing operators must overcome opposition from a powerful incumbent, gambling conservatives and those wishing to see tough social responsibility measures to protect players. In terms of regulatory-political relations, the industry may feel it is due some luck (or judgement), but even Sweden is likely to test hopes of the most bullish scenarios.UK: In Parliament – a long time in politics
Last year was gambling’s busiest year in Parliament in almost a decade, according to analysis from Regulus Partners.

During the course of the year, 139 written Parliamentary Questions relating to gambling were asked in the House of Commons – the highest number since 2008 (when bingo industry lobbying on taxation and residual concerns regarding casino liberalization helped push the number of written PQs to nearly 200). In that year, betting shops were the subject of just 13% of (gambling) written PQs in the Commons (where a specific sector was identified). By contrast, in 2017, more than two-thirds of (gambling) written PQs related to betting shops and FOBTs.

In addition to written Parliamentary Questions (which provide the most consistent measure of Parliamentary interest in gambling), 2017 also saw a large number of oral questions in both Houses, several Parliamentary debates, and three Early Day Motions.

A total of 57 MPs submitted gambling-related written PQs – the most prolific being the Deputy Leader of the Labour Party (and Shadow Secretary of State for DCMS), Tom Watson. With Labour launching a review of gambling addiction in Great Britain (led jointly by Watson and the Shadow Health Secretary, Jonathan Ashworth); the Government review of machines, advertising and social responsibility entering its third calendar year; the Gambling Commission’s probe into anti-money laundering procedures in online casinos; and the CMA and ICO investigations due to report, it seems likely that 2018 will be another busy year in Parliament for gaming and betting.

Kenya: gambling duty – government shakedown or market shake-up?
Kenya’s decision to raise gambling duty from 7.5% revenue to 35% has been upheld in court after an operator-led legal challenge was thrown out. A significant increase became an electioneering point last year, and while 35% was a ‘compromise’ on the 50% previously mooted, it is still a very significant hike and has already caused the market leader SportPesa to precipitately cancel its extensive domestic football sponsorships, upon which a number of major and grass-roots clubs have come to rely (it still sponsors two English clubs: Hull and Everton).

The ubiquity of mobile money and a very liberal fiscal-regulatory regime has made Kenya a standout success story for online gambling in Africa. However, the position was always fragile given the need for a level of domestic presence from a payments perspective, the very low rate of tax, and the huge visibility of betting advertising. While 35% is certainly toward the higher end of supportable duty rates, it is likely to disrupt rather than cripple the market, in our view, and may even allow market share to be taken from a dominant incumbent which built its business on a low-cost model now consigned to history. Kenya, along with many other markets, may yet again be illustrating that concentrated scale can be a curse as well as a blessing in rapidly changing fiscal-regulatory environments. Another useful lesson, often ignored, is that gambling business models built upon the assumption of low taxes are fundamentally flawed – sooner or later governments come to collect…

Argentina: capturing gambling revenue – pieces of eight
Argentina has announced that offshore online gaming will be subject to VAT federally at a rate of 21% (ie, 17.4%); there is also an emerging possibility of additional provincial charges. Enforcement is likely to be an issue, but operators wishing to demonstrate broader compliance may be captured by the legislative intention. While Argentina is not a large market by European standards, it is both material and potentially high growth. The move also demonstrates the extent to which the once disarmingly simple .com market is becoming both more complex and more expensive. While double digit growth remains available, these issues are likely to have little more than nuisance value, but as growth slows, or if risk is concentrated, then marginal increases in the cost of local operation can start to have a material impact on the bottom line. Argentina’s shifting VAT policy might also be a stalking horse for a more aggressive fiscal grab at online gambling.

UK: horseracing – Edwardian summer?
The BHA has announced that prize money should total £160m in 2018, 12% growth generated by the offshore levy (+£8m: already factored in, though with more potentially coming through with growth) and an increase in racecourse commitments to £84m (+£9m or 12%). Importantly, this increase will largely be directed at grassroots racing, which has faced significant long-term funding pressure despite recoveries in prize money since 2010. This is undoubtedly a good thing for the sport and for betting operators, though increased funding should only be seen as the beginning: making the money work productively is the real key.

Racing and betting still face two very significant issues, in our view. First, the generosity of racecourses is largely predicated on media rights which are in turn largely reliant upon a healthy retail betting sector: the DCMS Review puts this under threat and with it a material part of the current funding of racing.

Second, both field sizes and competitiveness have seen long-term decline which has not been materially reversed by recent increases in prize money; while some of this will take time, and some will be driven by the new focus on grassroots, improving productivity is key or relative decline is likely to continue. This requires detailed and data-driven cooperation, as well as a willingness to change, between all elements of racing and bookmakers: not something the relevant stakeholders have been good at in the past.

Indeed, these two issues of funding and productivity are likely to become increasingly linked (and should be): racing is likely to become relatively more important to retail bookmakers and is also being recognised as critical online; while bookmakers (across channels) increasingly need to make content work on its own terms rather than in vague reference to a (poorly understood) ‘ecosystem’ – the basis of a relationship built upon common interest rather than dependency is already there – a severe DCMS Review has the opportunity to make it as well as to break it.

UK: sports governance – near-100% compliance, but now what…?
UK Sport and Sport England have announced that 55 of the 58 sports organisations they fund which have been through the reform process thus far, have fully adopted the Code for Sports Governance. The three organisations which have yet to do so – The British Mountaineering Council, Volleyball England, and the British Equestrian Federation – are undertaking reviews and are expected to achieve compliance within the next three months.

To achieve such widespread compliance within a year of the (challenging, for some) Code going live is no mean feat, as the likes of Table Tennis England (funding suspended for a period while non-compliance was remedied) and British Cycling (late lobbying, reportedly involving the likes of Sir Chris Hoy, achieving the necessary support for reform) will testify.

However, with great focus within the Code on behavioural and cultural issues, the real challenge for the national sports bodies and the sports councils begins now. To change cultures and behaviours takes time, and monitoring and assessing such changes across many organisations will be challenging. Hopefully momentum can be maintained, and sufficient resources made available, to ensure that sports do not now relax having achieved (relatively high) structural benchmark standards, and remain committed (and incentivised) to implementing the Code in practice.

Malta: POS regulation – just business?

The MGA is once again facing press allegations that the industry that it regulates has mafia connections, this time from a domestic newspaper, in connection with the potential relocation of under-employed mobsters recently drummed out of nobbling horseraces in Sicily.

The MGA called the allegations “speculative and senseless” and reminded Times of Malta readers that POS online gambling accounts for 12% of Malta’s GDP. The story is likely to have little hard evidence (mobsters rarely leave any), but it does highlight the key weak-spot of POS regimes: business-friendly laws can be all too easily painted as exploitable by the unsavoury even in “speculative and senseless” ways.

This recurring theme, combined with many major banks’ distaste for gambling business (unless very large…), and the EC’s recent decision to drop infringement proceedings, is making the position of EU-based POS businesses increasingly uncomfortable, in our view; a risk which is likely to compound with Brexit probably removing Gibraltar as an option. While the tangible outcome of these risk factors remains unclear, they are likely to have an increasing impact on POC positioning, payments and perceived business value.